FTC v. LeanSpa, LLC, No. 11-CV-1715 (D. Conn. Mar. 5, 2015)
The FTC challenged the use of fake news (and no, they don’t
mean The Daily Show) to sell
LeanSpa’s weight-loss and colon-cleanse products online. LeanSpa sold its
products through websites it owned and operated, and also hired LeadClick to
advertise its products on LeadClick’s affiliate marketing network. “Affiliate networks gather ‘offers,’ which
are the products and services sold by various merchants, and recruit affiliate
marketers to drive Internet traffic to those offers on merchants’ websites.”
Affiliates promote merchants’ products in various ways, including by email,
banner ads, and search engine placement, as well as by creating their own
webpages to advertise the products.
“LeanSpa paid LeadClick a set amount – between $35 and $45 –
each time a consumer enrolled in LeanSpa’s free-trial program after having been
directed to LeanSpa’s website by a LeadClick affiliate.” LeadClick would then
pay the affiliate whose site drove the consumer to LeanSpa’s site, after
keeping 10-20% of the money as its share.
Some affiliate marketers used fake news sites to promote the products;
at the time, fake news sites were “fairly common” in the affiliate marketing
industry, and LeadClick employees knew this.
LeadClick chose which publishers to allow as affiliates and which to
deny; it hired affiliates who used fake news pages.
LeadClick staff occasionally discussed fake article pages,
fake news pages, or “news style” pages among themselves and with affiliates and
merchants. Sometimes, LeadClick allowed or at least failed to object to the use
of fake news pages. LeadClick employees referred to a particular set of terms
for the weight loss program—“Step 1” and “Step 2”—used on some fake news
sites. LeadClick employees also
sometimes suggested that affiliates alter their websites, such as by not
mentioning a free trial or by providing ingredient information for affiliates’
use. Once, an affiliate manager checked in with an affiliate to make sure his
webpage was “set up good [sic],” without any “crazy miss leading [sic] info.” The
affiliate manager agreed that it would be a “good idea” for the affiliate to
remove references to the webpage being a news site, and the affiliate manager
suggested that he could “just add advertorial.”
LeadClick also bought ad space for its merchants and
affiliates at other publishers’ sites, spending between $1-2 million/month at
its peak. Some of this space contained banner advertisements linking to fake
news pages that promoted LeanSpa’s products. “Sometimes LeadClick identified
fake news sites as destination pages for the banner advertisements when
negotiating with media sellers,” and sometimes it even emailed the seller
versions of the sites or sent links.
Further, the plaintiffs contended that LeadClick’s role in
helping LeanSpa to overcome its financial woes contributed to a violation of
Section 5 and Connecticut’s Unfair Trade Practices Act (CUTPA). LeanSpa had trouble because of high
chargebacks—charges disputed by consumers—and LeadClick helped it find new
credit card processors overseas, and also tried to help it to increase sales
volume so that the percentage of transactions that were chargebacks would
decrease.
LeanSpa eventually became LeadClick’s top producer—billings
increased from over $30,000 in September 2010 to over $2,000,000 in December
2010. But LeanSpa didn’t pay its full
debt. It owed LeadClick $6.4 million by
March 2011 and around $10 million by June 2011. LeadClick continued to provide
it ads in order to collect from it, though CoreLogic—which bought
LeadClick—ultimately decided to sue LeanSpa for the unpaid amount, and the
business relationship ended.
As for CoreLogic, LeadClick closed its bank account and put
its money into CoreLogic’s account. This was part of CoreLogic’s consolidation
of administrative founctions for its subsidiaries. Previously, CoreLogic had advanced $16
million to LeadClick, of which $8.2 million was repaid by the end of August
2011. “There was no agreed upon
repayment schedule or repayment deadline, no security for those advances, no
written loan agreement, and no interest due in connection with the funds
CoreLogic provided to LeadClick in 2011.” Then CoreLogic’s Board of Directors voted to
cease LeadClick’s operations.
LeadClick argued that it did not directly violate the FTCA
or CUTPA (the state statute, also allegedly violated) and that there was no
aiding and abetting liability under CUTPA. Initially, the court found the fake
news sites deceptive, using logos of genuine news outlets and formatting as if
they were news articles. E.g., a caption
under a picture of a reporter reads, “Julie investigates the Acai Berry diet to
find out for herself if this super diet works.” The articles said, “[W]e here
at [purported news station] are a little skeptical and aren’t sure that we’ve
seen any real proof that these pills work for weight loss. So we decided to put
these products to the test. What better way to find out the truth than to
conduct our own study?” The article then goes on to describe a week-by-week
analysis of the reporter’s results in using LeanSpa products, and concludes,
“After conducting our own personal study we are pleased to see that people really
are finding success with it (myself included :) ).” These were express claims
of independent investigation.
In addition, “[w]hile there is no express statement that the
comments [in the supposed comment sections of these sites] are made by
independent consumers, the implication is so clear that no reasonable jury
could conclude otherwise.” E.g.,
My friends and I have all been
waiting for the hca cleanse diet to hit the news. Atleast [sic] 5 of us have
all done the diet (costing us upwards of $300+) and we all lost a bunch of
weight. This stuff truley [sic] is incredible and has changed all of our lives.
Good luck to everyone who takes advantage of this wonderful opportunity.
False testimonials are deceptive. Deception results simply from
the fact that “the seller has told the public that it could rely on something
other than his word.” And these claims
were also material; the independent investigation claims were express and
presumed material, while “the claim that the comments were provided by
independent consumers is so strongly implied that it is essentially express, so
it can also be presumed material.” Even without a presumption, “no reasonable
juror could find that claims of independent testing – by consumers or reporters
– were not important to consumers’ choice.”
LeadClick argued that the material misleadingness of the
parts it was allegedly responsible for was a uniquely factual inquiry that couldn’t
be decided on summary judgment, especially given the involvement of other
misrepresentations made by LeanSpa. But “one material misrepresentation is not
excused by the existence of another misrepresentation.” Indeed, misrepresentations that are corrected
before purchase can violate §5 if they generate consumer interest, and “[i]f
full information does not save a deceptive claim from violating Section 5,
neither does an additional deceptive claim.”
LeadClick didn’t create the fake news sites. Can it be held
liable? The FTC described its theory as
an agency theory of liability, which I have elsewhere
advocated. It argued that LeadClick’s liability came from its control and
knowledge of the affiliate marketers’ activities, and thus from its own conduct.
Further, “[u]nder the FTC Act, a principal is liable for misrepresentations
made by his/her agents (i.e., those with the actual or apparent authority to
make such representations) regardless of the unsuccessful efforts of the
principal to prevent such misrepresentations.” Sometimes, a seller may be held
responsible even when the “salespersons were what might have been considered at
common law independent contractors.” Courts have held individual defendants
liable for a corporation’s conduct where they “(1) participated in the acts or
had authority to control the corporate defendant and (2) knew of the acts or
practices,” and the court found the same logic persuasive here.
It was undisputed that LeadClick employees knew about the
fake news sites. As for participation or
control, that can be shown by “involvement in business affairs” or “role in the
development of corporate practices,” including the “ability to review and
approve advertisements.” “[D]irect participation can be demonstrated through
evidence that the defendant developed or created, reviewed, altered and
disseminated the deceptive marketing materials.” Here, no reasonable jury could
fail to find that LeadClick both participated in, and had the authority to
control, the affiliate marketers’ conduct relating to the fake news sites. LeadClick
solicited and hired affiliate marketers who were using fake news sites to
advertise LeanSpa’s products, after screening them. LeadClick claimed that, “in
practice, affiliate marketers were not required to submit their ‘websites’ for
approval unless [it] specifically requested to see the page,” but LeadClick
still had the authority to review pages. After the FTC began suing affiliate
marketers for using fake news sites, LeadClick started to screen fake news pages,
and thus it had the authority to control them.
Although merchants like LeanSpa may also have had authority
to approve or disapprove the use of fake news sites, LeadClick had authority of
its own. “Just as LeanSpa would be
liable for approving requests to advertise with fake news sites, LeadClick, as
LeanSpa’s agent, is liable for its own decision to effectuate that decision.”
LeadClick also participated in the deception by buying ad
space on genuine news sites and selling it to affiliates who advertised with
fake news. That “provided a way for consumers
to browse directly from a genuine news site to a fake one,” and LeadClick
clearly knew this was happening, because it sometimes identified fake news
pages “as destination pages for the banner ads when negotiating with media
sellers.” LeadClick also affected the
products advertised on the fake news sites, which contained a purported test of
a two-step product combination. LeadClick implemented a rule that affiliates
had to pair LeanSpa products with other LeanSpa products. “No reasonable jury could find that LeadClick
did not have the authority to control affiliates’ use of fake news pages or
that LeadClick did not participate in the deception.”
CDA §230 did not change the outcome. The FTC’s claims were not based on “information
provided by another information content provider.” “[A] service provider is ‘responsible’ for
the development of offensive content only if it in some way specifically
encourages development of what is offensive about the content,” or
“‘contributes materially to the alleged illegality of the conduct,” Moreover,
“there may be several information content providers with respect to a single
item of information (each being ‘responsible,’ at least ‘in part,’ for its
‘creation or development’).” Notice of the unlawful nature of the information
is not itself enough to make the service provider responsible. But entities can be information content
providers when “the nature of the service provider’s product virtually
requires, or makes extremely likely, that users will create unlawful conduct.” In the Subway
v. Quiznos case, the court held that a jury could find that defendants were
information content providers where they “actively solicited disparaging
representations about [the plaintiff] and thus were responsible for the
creation or development of the offending contestant videos.”
I suspect Eric Goldman will be unhappy: Here, LeadClick
solicited and hired the affiliate marketers to advertise LeanSpa’s products,
knowing that affiliates used fake news pages and advised them about which
products should be advertised in the fake investigations. Plus, its media buys materially contributed
to the unlawful nature of the fake news sites “by providing affiliates running
fake news sites with a way to direct consumers from genuine news sites to fake
news sites.” Because the deception came from the misrepresentation that
independent testing was being conducted by genuine news reporters, LeadClick’s
media buying “contributed to that deception by providing consumers with yet
another reason to think that the news site was genuine.”
LeadClick also lost its arguments against the requested
monetary remedies. First, LeadClick argued that there were genuine factual
disputes about consumer reliance. While
proof of reliance is required for a traditional common law fraud claim, the
FTCA is not that. “Requiring proof of
subjective reliance by each individual consumer would thwart effective
prosecutions of large consumer redress actions and frustrate the statutory
goals of the section.” The FTC raised a presumption of reliance by showing that
LeadClick made material misrepresentations, those misrepresentations were
widely disseminated, and consumers bought the advertised products. LeadClick
did not rebut that presumption.
LeadClick then argued that the FTC’s equitable authority
under §13(b) of the FTCA only allowed injunctive relief. Making an argument we’ve seen before, it
contended that “the FTC’s federal court enforcement and litigation authority is
predicated solely on the language in § 53(b) providing that ‘in proper cases
the Commission may seek, and after proper proof, the court may issue, a
permanent injunction,’” and since LeadClick has been shut down, the FTC would
be unable to obtain a permanent injunction. No, because “courts have
consistently held that ‘the unqualified grant of statutory authority to issue
an injunction under [S]ection 13(b) carries with it the full range of equitable
remedies, including the power to grant consumer redress and compel disgorgement
of profits’” even when there’s no likelihood of recurrence.
LeadClick then contested the amount sought as disgorgement,
arguing that it could only be held liable for the amount it received from
LeanSpa and didn’t distribute to affiliates, which was zero. That also failed
because LeadClick received the money the FTC sought from LeanSpa. “[I]t is well
established that defendants in a disgorgement action are not entitled to deduct
costs associated with committing their illegal acts.” It doesn’t have to disgorge money it never
received, but it did receive over $11.9 million from LeanSpa. Its choice to pay
the affiliates didn’t matter.
Finally, the court found that CoreLogic was liable as a
relief defendant. CoreLogic advanced
over $13 million to pay LeadClick’s invoices, and then took LeadClick over, but
“ownership itself does not create a legitimate claim to the proceeds of an
owned entity if those proceeds originally come from unlawful activity.” If the advances were essentially investments,
and the $4 million transfer from LeadClick to CoreLogic was essentially return
on investment, then CoreLogic didn’t have a legitimate claim to the funds,
which did indeed come from the unlawful activity. The court investigated whether the advance
should be considered debt (creating a bona fide claim) or equity (not), and
used bankruptcy law as an analogy. Under
the factors considered in other cases, the advance was properly described as an
investment, not a bona fide arms’-length loan. CoreLogic advanced funds to
LeadClick “as part of its corporate policy to fund any ongoing business.” It was
undisputed that “there was no agreed upon repayment schedule or repayment
deadline, no security for those advances, no written loan agreement, and no
interest due in connection with the funds CoreLogic provided LeadClick in
2011.” Thus, no reasonable jury could find a bona fide debt.
1 comment:
Interesting case here. I'd like to see if LeadClick will be held accountable for knowing about a shady practice and continuing to affiliate themselves with the client. Thanks for sharing!
Post a Comment